Money is oxygen for a new business; here’s how to breathe

This article was originally posted on The Pivot Blog.

These days it’s more and more common to want to cast off the shackles of the 9-5 and launch your own business. You want to be your own boss and have the freedom and flexibility to live and work on your terms. And the time has never been better to make this happen. There’s a huge shift away from big corporates to smaller businesses, and the growth of technology means that it’s easier than ever before to operate a business. But like most worthwhile things, getting started is the hardest part.

To successfully start a business without a huge amount of stress, pressure, or resorting to couchsurfing for free rent and eating nothing but Vegemite on toast for years, you need to set up the financial side of things to run smoothly. It can seem like a big undertaking, but if you know the steps involved and the order to do them in, things get so much easier. In this post I cover the five steps you need to follow to launch your own gig WITHOUT making huge lifestyle sacrifices.

Step 1 – Understand the costs and steps involved in launching

There are a bunch of costs involved in starting a business. Some are absolutely necessary and non-negotiable, and others are nice to have. You’ll have legal and business registration costs, technology set up, branding and design and website costs, just to name a few; these all add up and you should know what you’re up for before you hit the ‘go’ button. You’ll also be up for some extra ongoing costs post your launch like software, services like bookkeeping, accounting, and maybe ongoing legal advice or help with finance.

You should be clear on these costs and steps involved so you so you can provide for the costs and take the right steps at the right times. If you don’t have a background in business and haven’t done this before, consider working with a mentor or adviser who can tell you exactly what you need to do and when you need to do it.

Step 2- Build your income buffer

As much as it would be great to think you’ll start a business one day and money will start rolling in the next day, it’s generally more sensible to assume no or low income from your new business for a little while, post launch. You need to think about how long you want to be able to cover your personal living costs before you start drawing an income from your business.

Everyone knows spending money is way more fun than saving it. But, how much you save dictates how quickly you’ll have enough money to quit your job and turn off your income. Your spending will also dictate how long your savings will last after you quit the 9-5.

Lay out all your income and day-to-day personal spending (i.e. outside of the business) and see what’s left for saving. Then think through any bigger ticket spending you want to do following your launch. If you’re happy to cut out expenses like travel in the short term, that’s cool and will save you some cash, but if you want to launch your business and enjoy your lifestyle along the way, you need to factor this spending in.

This amount will vary for different people and businesses, so think through the dynamics of the business you want to start and what you’re comfortable with. I’d normally suggest saving an absolute minimum of three months of living expenses, but ideally, closer to a year. This will reduce the financial pressure and mean you don’t have to stress about chasing the dollars from day one!

For example, if you know you need $1k each week to cover your personal living expenses, and you want to cover your costs for 12 months (52 weeks), you’ll need $52k in savings for your first year.

Step 3 – Plug any holes in your bucket

Starting a business is hard enough and you’ll want to hold onto every dollar possible. Holding too much debt is like trying to fill up a leaky bucket, you hustle to fill it up but the money is leaking away at the same time. If you start your business with a leaky bucket will give you less of a runway to help your business take off, so do everything you can NOW to reduce your costs before launch.

If you’re paying standard interest rates on personal debt you’re probably paying out thousands of dollars more than you have to. When you eliminate interest, every dollar you repay will reduce the amount you owe, so this could help you repay your debt faster. If you have debt, think about using a balance transfer option and a strategy like cascading debt repayments to pay off your debt faster and free up more cash to save.

Step 4 – Set your launch timeline

Once you’re clear on the costs to launch and run your business, and how long you want to cover your living expenses for, you’ve got your ‘launch number’. By looking at what you’re saving based on your spending plan and your current savings balance, you can start to work out how long it will take until you hit your ‘launch number’ i.e. your launch timeline.

A word of warning here – if you look ahead and aren’t happy with your timeline, don’t stress, this is completely normal! It just means you need to go back a couple of steps and see what you can adjust in your saving and spending plan to make it happen sooner. Think through which of your ‘wants’ are non negotiable, which are important, which can be delayed, and those that can be removed. It’s about priorities here. Make the adjustments needed to a plan and timeline you’re happy with.

Then print a calendar, post it everywhere around your house, make it your screensaver, and look at it EVERY DAY. Use this as a motivational tool to keep you focussed and on track as you countdown the weeks and months until you launch. This will help you reframe your thinking so you’re not just saying no to that night out or weekend away with mates, but instead saying yes to your business and future as your own boss!

Step 5 – Make it easy to stick to your launch timeline and saving plan

Once you have a plan to save to start your business in a timeline you’re happy with, you need to make it HAPPEN. Your spending, saving, and banking will have the biggest impact on how easy it is to stick to your plan. Set up your banking in a way that makes it easy. Automate your banking transfers, separate your spending, and set your savings to happen BEFORE everything else. Check out this guide to learn how to set up your banking like a boss and make it easier to save.

Another way to increase your chances of sticking to your strategy is being accountable. Most people think being money smart should be easy and that you should be able to do all this yourself. But with anything important, often the worst person to be accountable to is yourself because there are no consequences for stuffing up other than you kicking yourself for a brief moment (which is quickly forgotten when you start playing with your new tech toy, take off on that spur-of-the-moment weekend away, or order up a round of Cafe Patron shots at the pub).

With an ‘accountability buddy’, you know an uncomfortable conversation is coming if you haven’t done what you said you would. Your buddy could be a friend, partner, or Financial Adviser. The person needs to understand what you’re working towards and be able to have tough conversations when they’re needed.

Your Next Steps

Launching your own gig is a big undertaking. If you know what to do and put a good strategy in place to get there, it’s totally achievable. But it won’t just happen by itself! Unless you want running your own business to be a pipe dream that never actually happens, you need to take action.

It’s so easy and common to spend most of your time doing things that are (or seem) urgent, but aren’t important. Setting up your money to launch your own business is something that’s never going to be ‘urgent’ but if it’s important enough to you, you need to make this a priority so that it happens.

Take action. Now. Start small, be consistent, and make it happen. Don’t fall into the inaction trap that’s so common or a year from now, you’ll wish you started today.

Ben Nash is a Financial Adviser and the founder of Pivot Wealth, a money management company that helps young professionals make smart money choices.